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Garmin, Ltd.
Which Way to Turn?

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By todayfearorgreed
November 5, 2009

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After listening to the conference call, Garmin spokespersons don't prognosticate any rosy immediate future in the navigation and communication industry. Pre market this morning GRMN was trading up nearly $1.50 per share but as I write, it is down $3.69, almost 12% for the day and about 30% off from last week when Google's application was announced.

So, SELL? This company has had it's day and now is just a minor, minuscule, player in the phone business and ultimately an "also ran" in the PND/Auto GPS market which, as everyone knows, will all but disappear as phone apps improve. While they continue to make devices for the marine and aviation industries, this only represents a small portion of gross revenue. Apparently Goldman Sachs analyst Thomas Lee was correct back in mid August when he "added shares of the GPS device maker to the firm's Conviction Sell list. Lee maintains his $23 price target on the stock..."

But wait, I blasted Mr. Lee for his downgrade in August based on the 2Q earnings report! Maybe I should read/listen again to the 3Q report, which is headed with "Garmin Reports Strong Third Quarter Results on Sequential Growth in Revenues and Operating Margin Resulting In Year-Over-Year EPS Growth"

Mr. Lee wrote in August: "We expect GRMN to move closer to our price target as we believe the market is over-estimating the sustainability of the company's strong Q2 gross margin performance" And he was correct, gross margins moved to 52.4% from 52.6% in the second quarter of 2009. Good call Mr. Lee! However, operating margins improved from 29.8% in the 2Q to 30.3% in the 3Q. In the "question and answer" following this morning's report, Garmin individuals believed they will "continue to experience cost declines and efficiency in design."

Consumers buy PND's and consumer's are not buying which would explain why Garmin"s AUTO/MOBILE segment sales were off 13% in the third quarter versus 3Q'08. But, they are off 27% YTD versus 2008. Doesn't that indicate these sales are picking up? In fact, total revenue for the quarter are off 10% compared to the same period in 2008, but YTD sales are off 23% compared to the same period in 2008. Again, doesn't this indicate an improvement in the 3Q?

Back to one of Mr. Lee's quotes in August: "supporting our view that PNDs will follow a similar unit/ASP trajectory to other commodity consumer electronics such as PDAs and digital cameras. This, coupled with increasing smart phone cannibalization..." Just bury Garmin! Sell while you can still get $27.00! Don't be the last guy to own this "flash in the pan" company...

I really don't get it! If you never used a GPS before, or never owned a PND and suddenly you bought the new Motorola phone with the Google map product, I can understand you might say/think "this is great, why would I ever spend $100 to $1,200 for a PND when I have this nifty little gadget?" I get that! What I don't get is the thinking that smart phones are a replacement for PND's for those that really appreciate navigation. Call it whatever you want, it is not the same thing.
While Mr. Lee seems to believe digital camera sales have declined due to cameras in our phones, they have actually increased. I have a great little camera in my blackberry which I use and appreciate often, but I own a Nikon digital camera and a Sony digital video camera, neither of which will be replaced by my "phone". It's the same with Garmin's products (or Tom Tom, or Raymarine, or...) Mr. Lee, and for the past several days, the market, just do not agree with me.

Garmin's revenues were anticipated to be $704 million but were actually $781. Consensus earnings per share was $0.69 (high was around $0.87) while actual EPS came in at $1.07. Cash and Securities are 51% of total assets, shareholders equity continues to increase, they have NO DEBT, dividend is about a 2.7% return at today's price, P/E ratio is less than 11, there is no change in what has been excellent management team, new products are offered all the time...

Really, add that up and tell me what where to put my money after I sell Garmin? Cash is an idea but at 2.7% return on dividend, I am really better to hold my current shares. Those of you that think Garmin will drop to $23 as Mr. Lee believes, please write to me when it does with the "I told you so's" that I deserve. I believe, Garmin will BOUNCE!